The John McCain Market Selloff

by: Barry Ritholtz

Ever since the Primary on Tuesday, the markets have aggressively sold off. This clearly indicates the equity market's fear of a McCain presidency.

As the charts below show, ever since Tuesday -- when McCain's Intrade price soared -- stocks have been under continual pressure.

Had Barrack Obama knocked out Hillary Clinton, a mano-a-mano contest would have taken place. A well rested, fully funded Democratic nominee would have been a very tough opponent for the aging Arizona Senator.

However, the Democratic nomination now looks certain to go on for much much longer. It is highly likely to:

-Physically and emotionally wear down the two Democratic candidates;
-Force them to consume much of their war chest;
-Lead the electorate to become tired of the rhetoric, and disenchanted with both candidates;
-Prevent the candidates from spending time doing much opposition research on McCain.

All of this works to McCain's favor. He can therefore rest, save his campaign war chest, maintain media presence (but not to the point of over-exposure). All these positives show up at InTrade (see charts below), where McCain's bettors have upped the ante, sending his futures skyward.

And, the stock market has sold off, therefore proving that McCain must be bad for stocks and for the economy.

John McCain Futures Rally

The John McCain Market Selloff


Of course, I don't believe a word of that. But you would be surprised as to how many otherwise intelligent people spew variations of this sort of nonsense every day.

I will unequivocally state that anytime you hear this sort of nonsense, you can rest assured that the speaker is a) an unabashed partisan; 2) relatively clueless about how markets operate; iii) never worked on a trading desk.

Markets operate not as forecasters, but as discounting mechanisms. Consider what has to be discounted to credibly say this: First, we would need to know who is likely to win the next election, 8 months in the future.

Remember, eight months ago, it was a lock that Rudy Giuliani was the GOP nominee, and Hillary was going to easily capture the Dem nomination. In case you haven't been paying attention, eight months is a lifetime in politics.

The next president gets sworn in on January 20, 2009. They have to put together a series of legislative proposals, then get them passed by Congress, then fund them. Then, they have to begin implementing them. The impact of these would likely be felt sometime around 2010.

Hence, the utter absurdity of the short term market twitches somehow reflecting unknown possible events, and their likely macro impact, several years hence. Ridiculous.

Consider these questions as the more likely stimuli this bloody market is actually responding to -- the nearer term events that are still unfolding today:

-Are we in a recession or not?
-Is the credit problem fixed yet?
-How much worse will housing get?
-Will earnings rebound in the second half of 2008?
-Will the US dollar ever stop falling?
-Are US deficits going to continue to skyrocket?
-How much more will consumers pull back on their spending?
-(Did I mention the housing picture is a disaster?)
-The war in Iraq is God-awful expensive, is there any relief in sight?
-Is Oil going to go to $150?
-Can the wobbly banks regain their footing?
-And how much more will inflation heat up?

The markets have enough data to digest before they even remotely begin to consider who might be president in 2009, and what they might do . . .